January 23, 2023 - 6 min read
With more enterprises and governments exploring the opportunities afforded by digital assets and better legislative certainty, the emphasis on crypto insurance is anticipated to increase.
Cryptocurrency insurance, like other forms of insurance, covers harm caused by unforeseeable events. Unfortunately, the highly volatile cryptocurrency market is frequently the subject of multimillion-dollar hacks, causing investors to lose millions and the industry to lose billions.
Chainalysis highlighted in its 2022 Crypto Crime Report that cryptocurrency-based crime reached an all-time high in 2021, with illegitimate addresses receiving $14 billion throughout the year, up from $7.8 billion in 2020.
Crypto insurance is a form of insurance coverage designed to cover losses resulting from cybersecurity breaches. Most of the largest cryptocurrency exchanges carry at least some insurance to protect the digital assets under their control against theft and other security breaches.
Since cryptocurrencies are not legal tender, they are not insured by banks in the same way that traditional deposits may be. For instance, the Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation often protects bank deposits in the United States.
Cryptocurrency insurance protects against such occurrences, granting investors peace of mind that did not exist in the cryptocurrency industry until recently. Furthermore, it protects against loss, so investors may develop and trade fortunes without fear that a single hack or malicious attack will wipe out their whole wealth.
Lloyds of London was known to be the first insurer to offer crypto liability insurance with limits as low as £1,000 (about $1,353). It was co-created by Lloyd’s syndicate Atrium and Coincover to safeguard against damage from the theft of cryptocurrencies housed in online wallets.
This insurance policy has a limit that rises and falls proportionally with the price of crypto assets. In other words, the insured will always be compensated for the asset’s underlying value, even if it fluctuates during the policy duration.
Another company, BitGo, insures cryptocurrency holders up to $250 million. However, they require customers to hand over their private keys, which could be a deal-breaker for those who want more control over their crypto assets.
In addition to Lloyds and BitGo, a variety of new, decentralized insurers are popping up. For example, Nexus Mutual, InsureAce, and Opium Insurance are all decentralized insurance protocols that helps protect crypto owners against hacks and smart contract failures.
The worth of cryptocurrencies has recently risen; they are trading for billions of dollars, and combined market capitalization is expected to reach $5 trillion in a few short years. This has led to a significant increase in online wallet and exchange thefts. The average investor has thousands of dollars worth of these digital currencies, which are more vulnerable because they are housed in a virtual place rather than a physical vault.
Numerous hacks have put crypto assets at risk in 2021 alone. Due to the Poly Network attack alone, more than $600 million were stolen from Ethereum, Binance Smart Chain, and Polygon wallets.
Investing in cryptocurrencies has the potential for substantial gains, but the cryptocurrency market’s volatility poses significant risks. There is a legitimate demand for crypto insurance plans, yet policies and rates in the insurance sector tend to be based on past data. Due to the crypto market’s youth, historical data tends to be scarce, and market volatility can further complicate the process.
This insurance gives the protection investors require and enables them to expand their investment with the confidence that they will be compensated in the unlikely event that their property is stolen.
The volatility of cryptocurrencies is exceptionally high. As a rapidly embraced asset by investors and traders, price movement speculation plays a significant role in the value of cryptocurrencies at any time. Media outlets, influencers, business moguls with strong opinions, and well-known Bitcoin enthusiasts generate investor anxiety, resulting in price volatility. Supply and demand have the most significant impact on the prices of most commodities. Bitcoin’s market value is determined by the number of coins in circulation and the willingness of buyers to pay.
As an increasing number of people use cryptocurrencies for everything from day-to-day transactions to retirement investments, they attract the attention of malicious actors. Hackers, infiltrators, and robbers find the vast amounts of currency traveling through exchanges irresistible, employing every available method to gain access to it. As a result, Bitcoin’s security has been an issue since its beginnings.
Blockchain technology is known to be secure and hard enough to hack, but it has never been invincible. At every point of the transaction process, security threats are virtually inevitable. From exploiting hot wallets to plain fraud, hackers will attempt to obtain digital funds by all means possible.
The US Federal Trade Commission (FTC) reported that over 46,000 customers lost over USD 1 billion in cryptocurrency to scams between 1 January 2021 and 31 March 2022. FTC noticed that this was greater than any other payment method. The US government agency also discovered that 70% of frauds included Bitcoin and that more than 50% of scams began from harmful advertisements, posts, or social media communication. Losing or forgetting the investor’s private key, a secret number akin to a password, can also be a severe issue. We know the private key is unrecoverable; ignoring it implies that account funds may never be accessed. Hackers can also take private keys if they exist on any internet-connected device or service, such as a custodial wallet.
Yes, yet the solution is not as easy as a single word. As per Brian O’Connell, an insurance expert at Insurance Quotes, the majority of crypto assets are not currently insured due to the relative immaturity of the cryptocurrency sector. The central portion of the Bitcoin insurance market is more likely to be held by cryptocurrency exchanges than by people trading cryptocurrencies. Therefore, you must verify directly with your platform to determine if you are covered as a crypto purchaser when selling on that platform.
Even though the cryptocurrency market is still highly unpredictable, investors shouldn’t let this discourage them from taking action. Regardless of whether you think cryptocurrency is a good long-term investment or not, the fact is that it already plays an essential role in the economy of the entire world and is likely here to stay. In addition, we feel that insurers ought to play a part. The cryptocurrency market has broken through to the public, and the industry will continue to grow as more individuals adopt and invest in digital assets. This industry is virtually unregulated, so the growth potential is nearly endless. Nevertheless, the risk-averse insurance market is hesitant to invest in it because of its high potential for loss.
To level up and gain a deeper knowledge of all things related to the future of the cryptocurrency industry, check out the latest content in the Supra Academy section.
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